AdminIt’s difficult to come together when the parties in a dispute are not looking at the disagreement in the same way.
Two of the most important concepts in Chinese culture are guanxi and mianzi. Guanxi is defined as sharing favors between individuals, connections, relationships, and the ability to exert influence. Mianzi means face: saving face, losing face, and giving face.
Attempts by the SEC, and the PCAOB, to talk sense into Chinese regulators about auditor regulation and the problem of fraud in Chinese-based companies listed in the US is based on the preposterous assumption that all parties are speaking the same language.
What’s most disappointing is that the “babel” is both disingenuous and unnecessary.
Some recent major media stories attempt to illuminate the issues but only support the posturing that’s going on by the SEC, in particular, about what they can do now and what they did do from the beginning about the problems of sham companies listing on U.S. exchanges.
Peter Henning of The New York Times DealBook “White Collar Watch” chimed in recently with a “poor, poor Deloitte” column. He laments the fact that the global audit firm is between a rock and a hard place when it comes to choosing between kowtowing to the Chinese or keeping U.S. regulators happy.
What Henning doesn’t mention is that the PCAOB knows, and the SEC knows, that Deloitte Shanghai and all of the audit firms registered with the PCAOB in China never agreed to submit to U.S. requests for information. They never checked that box on their registration form with the PCAOB. The PCAOB, and the SEC, accepted those conditions at the time of registration. According to PCAOB spokesperson Colleen Brennan, the PCAOB did expressly remind, via letter, all firms that declined to agree to cooperation requirements because of potential conflicts of laws that they were not off the hook. This, however, is the first test of legal wills based on that approach.
Unless the SEC plans to rescind all listings of issuers that are audited by an audit firm the PCAOB can’t inspect – the PCAOB is also prohibited from inspecting registered firms in the EU, for example – or where a US audit firm depends on a material portion of the audit from a network member firm in a country the PCAOB can’t inspect, they need to shut their posturing pie hole and figure out another way to shut down the reverse merger loophole and investigate the frauds. They have been looking the other way for years while the audit firms have grown by leaps and bounds in China and other parts of the world that prohibit inspections.
The SEC knows the documents they want about Longtop and other Chinese frauds can be retrieved from the Deloitte U.S. firm. Their original complaint to the court said so. I described how they could do it in a previous Forbes post. I told the SEC attorney on the phone I would explain to him exactly how to do it if he still did not get it.
Now, Reuters reports in an inflammatory piece supported only by two anonymous sources, that the Chinese government called an Apalachin Meeting of the accounting leaders in China, stirring up fears of firing squads for disclosing state secrets.
China’s financial regulators have asked the world’s biggest audit firms to urgently review their work on U.S.-listed Chinese companies and give details on information they may have provided to overseas regulators, two sources told Reuters.
Talk about nuts. What are the Chinese going to do? Shut down email? The purpose of Chinese audit firms with global network relationships is to audit Chinese companies listed on non-Chinese exchanges and to support audits of Chinese subsidiaries of non-Chinese listed firms. A de-registration of those Chinese audit firms by the PCAOB, for example, or a shut down by Chinese regulators of outside contact by the Chinese firms would cripple global commerce.
They might as well wrap the whole country into a wonton and say “Good night, Irene.”
Carson Block, of the famous Muddy Waters Research Chinese fraud sleuthing firm, told the PCAOB, the accounting regulator, that the whole Chinese market and the auditors that audit it are corrupt:
As an investor who has invested considerable amounts of money in China, and in the process helped to identify Chinese frauds traded on US exchanges, I support your initiative…Even the most reputable auditors in China seem to be in a race to the bottom. We believe that there are particularly egregious situations in which some Big Four partners in China offices have actually conspired with their clients to defraud investors. Further, it is a reasonable proposition that the conflict of interest inherent in the Chinese auditors’ business model also affects the quality of US company audits.
Soyoung Ho, who writes for Thomson Reuters Insights (subscription only), has posted some thoughtful articles on the subject but the quotes she gets sometimes don’t add up.
Deloitte’s Chinese Affiliate May Be Exposed to U.S. Court Decisions
Roberta Karmel, a professor at Brooklyn Law School and a former SEC commissioner, had some harsh words for the SEC and the New York Stock Exchange to even let U.S. investors be at risk in the first place by allowing Chinese companies-many of them that are found to have accounting problems-to be listed in the U.S..
“Should the SEC allow any companies that are audited by auditors who refuse to produce information in U.S. courts to be listed on an exchange to be sold to U.S. persons?” Karmel said.
“Should the New York Stock Exchange allow a company to be listed under circumstances where its auditors are not going to be forthcoming with information if problem arises? It’s kind of giving a stamp of approval to the companies which they don’t seem to deserve.”
“They have been structured as a worldwide organization. They have separate [firms] in various jurisdictions,” Karmel said. “How can Deloitte say ‘oh yes, we have Deloitte Shanghai and they are Deloitte, but we have no control over it’? They are, however, putting their names on these audits. That seems to be a preposterous posture.”
As a former SEC Commissioner, Professor Karmel should know that Deloitte U.S. and the international coordinating firm, Deloitte Touche Tohmatsu Limited doesn’t control Deloitte China any more than I can control my 130 lb. Rottweiler if she’s determined to chase that squirrel.
Read the fine print. The global audit firm network is a legal structure created to support a brand, not a professional services firm serving the public and the global financial system.
Or maybe read the decision of the Florida court in the Banco Espirito Santo case against BDO International. Or look at why the SEC and PCAOB did not sanction the PwC U.S. firm or PwC International Limited for the $1 billion in sins of Price Waterhouse India and its audit of Satyam, a U.S. listed, India-based company. Or look at why the plaintiffs settled rather than going to trial over claims against the U.S. firm and International firms in the Satyam case and the Parmalat case.
The only thing Professor Karmel gets right is all this posturing is preposterous.
[Source: www.forbes.com; Author: Francine McKenna]
